Don Boudreaux injects a dose of economic sanity into the debate by reminding Fletcher that "Such a claim reveals its author to be unaware that another name for “U.S. trade deficit” is “U.S. capital-account surplus” – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America."

The chart above shows just how significant those foreign capital inflows into the U.S. economy really are, using BEA data on "direct investment" by foreigners. Foreigners are also buying government Treasury securities and other private U.S. securities (stocks, bonds, bank CDs, etc.), but the chart above is showing just the capital inflows into American companies in industries including manufacturing (auto plants from investments by Toyota, Honda, BMW, the carbon steel processing plant Thyssen Krupp in Alabama that Jetbeagle mentions in the comments, etc.), retail trade (IKEA), publishing, telecommunications, finance and insurance, real estate, engineering, mining, utilities, computer systems, construction, hotels, health care, transportation, etc. (see BEA website here for more information).

Bottom Line: As a direct consequence of our trade deficit, foreigners have invested almost $3.5 trillion directly into the U.S. economy since 1960 in American companies, with about half of that investment occurring in the last decade. Those trillions of dollars of investments in U.S. companies HAVE generated HUGE benefits for the American economy, and are responsible for millions of U.S. jobs for Americans working at Toyota, Honda, BMW, IKEA, etc. In 2008 (latest year available), foreigners owned almost $12 trillion of total corporate assets in the U.S., and those foreign-owned companies generated almost $3.5 trillion in sales, spent almost $200 billion on property, plant and equipment and employed 5.593 million Americans (data here).

27 Comments:

China has practiced none of the free-trade notions of Western economists, and yet it is booming. It is debt-free too, while we have borrowed mountains of money.

There are huge "institutional imperfections' in the real world, that may frustrate the theories of those ensconced in Ivory Towers atop a misty Mt. Olympus.

It could be there is more than one way to skin a cat.

Meanwhile, it seems a consensus that the lower exchange rate for the US dollar is enhancing exports and manufacturing, and thus increasing the size of our GDP. Perhaps, by one percent perhaps in the latest quarter.

Hmmm. Are we so sure China is wrong in its protectionist, exchange-rate-pegging impulses?

Would an even lower exchange rate, and perhaps some teeth in Intellectual Property law enforcement really be so bad?

China must owe Hollywood tens of billions of dollars (they just pirate everything, even before we see it in the US). Would tens of billions of extra dollars in Hollywood help is in Southern California? No?

They sell, we buy. We run out of money, they loan us money to buy more. We get nervous, they pat us on the head like the confused, insecure, dull little urchins we are and we sign on the paper. More credit.

Then, we belong to them forever.

It must be something we drank; we couldn't have been Born this stupid.

To induce U.S. demand, foreigners have to give-up producer surplus to the U.S. (i.e. increase U.S. consumer surplus), and find ways to increase producer surplus (for the U.S.) to sustain U.S. demand (year-after-year, decade-after-decade, because of diminishing U.S. marginal utility).

However, that doesn't show up in trade balances.

So, the U.S. may actually have trade surpluses, with the rest of the world, instead of trade deficits.

I stated before:

If someone is willing to sell you something for half price, you may not buy twice as much.

You may buy three times as much (given your budget constraint).

So, for example, you'd "import" three units for $15 and "export" one unit for $10, creating a $5 trade deficit.

However, you really exchanged your $10 good for three $10 goods, or $30, i.e. a $20 surplus.

Also, foreigners lend the U.S. $100 to buy their exports. However, the U.S. pays them back less than $100, through differences or changes in inflation, interest rates, and currency exchange rates, which induces U.S. spending and borrowing.

The U.S. may borrow $100 today, then owe $99 (in real terms) a year later, $90 five years later (through compounding), $75 ten years later, etc. to maintain the virtuous U.S. cycle of consumption-investment in the long-run.

The U.S. has become a "black hole" in the global economy, attracting imports and capital, and even attracting the foreign owners of that capital themselves.

As Mark points out, foreigners have been investing billions each year in the U.S. and continue to do so. And, no, that investment is not just purchases of T-Bills.

Direct investment in the U.S. includes hundreds, oif not thousands, of manufacturing facilities, including:

- The vehicle assembly plant Toyota built the past decade in San Antonio;

- The carbon steel processing plant Thyssen Krupp opened in Alabama last year, and the cold rolling mill it will open later this year;

- The huge expansion of Shell Oil's Port Arthur, TX, refinery which will make that facility one of the largest in the world.

I could list many, many more examples of foreign built factories and foreign owned facilities in the U.S. And that will unlikely convince those of you who have listened to ignorant demagogues such as Donald Trump and Lou Dobbs, or to economically illiterate main stream media types. You can continue to demonstrate your own lack of knowledge. But that won't change the fact that global trade has raised and continues to raise the standard of living for Americans and for everyone else in the world. Global trade has been a net job generator for the U.S.

"Foreigners are also buying government Treasury securities and other private U.S. securities (stocks, bonds, bank CDs, etc.), but the chart above is showing just the capital inflows into American companies."

This does NOT include the purchases of Treasury securities, private equities, corporate bonds, real estate, bank deposits, etc., the chart is ONLY the "Direct Investment" portion of our capital account surplus.

By the way, I did not expect the full amount would be T-bills in any case. As Jet stated the investment also includes building plants, upgrading facilities.

Jet, your points noted, a Toyota would recycle dollars gained through revenues in America to build the plant, rather than repatriate the dollars into Japan. So Toyota wouldn't necessarily invest $1B+ of foreign funds. So, I am thinking the $3.5T should be non-established companies investing in operations here.

What is most misleading, and most common, is to talk about the U.S. current account deficit ("trade deficit"), without mentioning the offsetting capital account surplus, e.g. Ian Fletcher and the media. The full balance of payments (BP) equation is: Current Account + Capital Account, but all we ever hear about is the Current Account, with almost no mention ever of the Capital Account.

Juandos, the U.S. government is able to squander enormous wealth, because of the massive wealth created by the U.S. market economy, including the wealth generated from international trade.

Also, the U.S. government has proven to be adept at trapping the American people into inferior economic policies, while continuing to disregard the will of the American people, to prevent more economic traps, and attacking the people (by words and actions) who create the wealth the government destroys.

“As free traders encounter more scrutiny and fewer believers the probability of name calling approaches 1.0”

Is the opposition to free trade an example of “economic illiteracy/lunacy and anti-trade nitwitery” or is that description due to frustration with a growing opposition to free trade as the arguments that once worked now meet doubt?

It ain't bragging if you can do it. Free trade is not doing it. With each and every free trade deal we were promised prosperity. We were going to give up poor jobs for good jobs. Are we there yet? In order to believe that free trade is a good thing you have to believe that if we had not engaged in free trade the current economy would be worse than it is. That is a tough sell. If free trade is not the primary cause of the poor economy then what is? Every explanation I have ever heard is unconvincing either because it happened in the past (tariffs, high taxes) without producing a bad economy or it is the result (low savings rate, labor skills mismatch) of a bad economy rather than the cause.

As my mother explained to me after being called into the principal's office to be informed about a fist fight I was involved in when the opposition starts calling you names consider it as acknowledgment that they know they have the short end of the argument.

Fletcher's claim: "...Fontana, California, and the other badlands of America’s industrial decline." shows him to be either woefully ignorant or intentionally deceptive, as Fontana is, in fact, a thriving community, with a variety of industries locating there since the closing of the Kaiser Steel production plant in 1984. In fact, by the time of it's closing, the plant was no longer the major employer in the area, and the closing actually caused very little pain.

The Kaiser Steel plant was hurriedly built during WWII to supply west coast steel needs, and was the only steel mill west of the Mississippi. It occupied the site of a former pig farm, and was built far enough inland from the Pacific coast to be out of range of Japanese naval guns, had they managed to approach close to shore.

Interestingly enough, the finished steel operation which remains at the Fontana facility, as California Steel Industries Inc, is 50% owned by a Japanese company.

"If free trade is not the primary cause of the poor economy then what is?"

Surely you can do better than that.

"That must be it, because I don't know what else it could be."

Climate change alarmists use this same argument.

In my opinion, any increased opposition to free trade does indeed stem from economic illiteracy, which is encouraged by even more economically illiterate politicians, who are only too happy to bluster on about the misdeeds of those evil foreigners, in hopes of redirecting the rightful anger of their constituents away from their own failures due to incompetence.

Ignorance of what free trade really is allows so called "free trade" agreements between national governments to be mislabeled as free trade.

It appears that both you and Fletcher have missed the recent news that the US has been in a severe recession, as well as not understanding the concept of 'balance of payments'.

Although he didn't elaborate, I believe Fletcher referred to Gary, IA and Fontana, CA as examples of former steel mill towns that were destroyed by the loss of that industry to evil foreigners through something known as 'free trade'.

If that is his point, then he missed by a wide margin as far as Fontana is concerned. Fontana has done quite well until the recent economic downturn, caused by disastrous government policies, not a trade deficit.

I am assuming that you read the Boudreaux article at Cafe Hayek blog, but if not, I would encourage you to do so before you comment further, so that we can be sure we are discussing the same concepts.

You might also consider expressing your concerns at that blog as well as here, as Don responds quite frequently to comments in a clear and understandable manner.

1) Considering that the USA is the premier producer of IP, and actually produces a massive amount of the "external" (i.e., non home-nation generated) IP used by the world, almost without exception, I'd like to point out that a huge percent of that IP is heavily pirated. If each nation that pirated our IP actually had to pay a rational price for it (i.e., not the idiot-based "asking price" the producers demand, but what they'd actually be willing to pay if they had to do without but don't), then I'd bet the "balance of trade" would wind up being positive

2) Peaktrader @1:29 is right, Rufus, otoh, is an idiot. The nations in question don't have "us" -- they have IOUs. At some point, they have to apply those IOUs to purchase something in the USA. Since there's really not much you can buy here with them that they can take back to China/Whereever, they have to do much as the Japanese did in the late 80s -- remember that? -- and buy companies, etc., but the problem there is, if they start doing that anything but gradually, then they drive the prices up. WAY up. Think Housing Bubble -- remember that? -- and then they find they've overpaid, usually, for a decent asset. And then they go bankrupt or get into financial difficulties, and wind up selling most of those recently purchased things back to Americans at fire-sale prices -- remember that?...

James, your argumentation-ad-absurdum aside, just because someone calls you an idiot, doesn't mean you're NOT an idiot.

If you're going to claim you're not an idiot, and the name-calling is an attempt to sidestep reasoning and critical thinking, you have to first stop polluting the dialogue with stupid and idiotic assertions like, oh, most of the unsupported and rather blatantly doubtful junk in your various missives.

I'll detail one, here:

>I am with Fletcher. 13.7 percent is industrial decline not thriving.

Yes, it's "free trade" causing this decline. It can't POSSIBLY be California's lunatic governmental policies and so forth chasing out every rational thinking person (note, btw, that YOU are apparently still there) as well as chasing off any rational investor.

Offer me a 50% return on my money and I might, just maybe, allow someone to apply it to something due to take place in Cali. Anything less than that, I'll settle for the 10-15% I can get elsewhere.

The chances of any successful new business venture in Cali in the next 10-15 years is vanishingly close to zero.

And that's pretty much without any effort to argue that Cali is hardly a bastion of "free trade" in the first place. For that, you have to look more towards Texas.

I repeat -- just because I call you an idiot, it does NOT mean I don't have justification for it -- it only means I see sufficient evidence that you're such a complete and total idiot that I think it's pretty much a waste of time to point out to you, in extensive detail, WHY you're an idiot.

You are so far beyond grasping how little you actually know, while buffed up in ego about how much you imagine you DO know, that it's like beating one's head against a brick wall to attempt to explain it to you.

“The chances of any successful new business venture in Cali in the next 10-15 years is vanishingly close to zero.”

Do you really expect Palo Alto, California based Facebook to fail in the next 10-15 years? Mark Zuckerberg was born in New York but chose to bring his business venture to California. Wonder why? Do you think he might see something you missed? Note also that while total venture capital spending is down from what it used to be California is getting a larger percentage of it today than in the past. Housing prices here have held up better than is most of the nation. Wonder why?

If you want to invest in a McDonalds I suggest that those people in locations with the highest taxes also have the highest profits. Why? Because they also have the most customers resulting in more profit even with the higher taxes.

As for being an idiot that may be but I would point out that I have a Bachelor of Science in Mechanical Engineering, a Master of Science in engineering with a major in aeroelasticity (that branch of applied science which studies the interactions among inertial, elastic, and aerodynamic forces), and a Master of Business Administration. My work experience includes dynamic loads analysis on the C-5A and S3A airplanes and flutter analysis on the F-14, and Pogo analysis on the Space Shuttle. Pretty good resume for an idiot eh?

Having seen some of my posts on this site would you at least acknowledge that I can think for myself? When Galileo looked into his telescope and reported seeing what he was not supposed to see he was ridiculed. He responded by having his detractors look for themselves. They did so and denied seeing what was there. This site is devoted to the orthodox view of free trade to the extent of denial. You put on the blinders and ignore anything that does not fit your world view. Both my training and disposition tell me to go with the data. I am well schooled in the theory and promise of free trade. I look at the real world and find the reality before me is inconsistent with the theory and promise of free trade. The emperor Free Trade has no clothes and I am willing to suffer your rebuke to point it out.

By the way, aren’t you name callers just a little bit embarrassed to admit that such an idiot can get under your skin?

First of all, let me say that you have a very impressive resume - for an engineer. I see nothing that qualifies you as an expert on economics. You didn't say where you acquired the MBA, but based on what I know of higher education in the US, I would think there's a good chance you emerged with economic views more in tune with those of Lord Keynes, than those of Hayek. Unless you have rounded out your economics education since then, you may be lacking some important concepts.

I have also observed that often, the more formal education a person has, the more impressed they are with their own knowledge and ability, and the less they are willing to alow new or different information to enter their world.

"When Galileo looked into his telescope and reported seeing what he was not supposed to see he was ridiculed. He responded by having his detractors look for themselves. They did so and denied seeing what was there. This site is devoted to the orthodox view of free trade to the extent of denial. You put on the blinders and ignore anything that does not fit your world view."

Are you comparing yourself as Galileo here? Such arrogance! perhaps you are proving my point about people being impressed with themselves. Do you really see yourself as a contrary voice, bringing illumination to the ignorant masses?

Perhaps you have it backward. Could it be that some at this blog are the Galileos, and you the one who refuses to see what's being shown to you?

"I look at the real world and find the reality before me is inconsistent with the theory and promise of free trade."

The real world, eh? Your view of the world isn't likely any more complete than anyone else's. I'm reminded of the story of the blind men encountering and describing an elephant.

"If you want to invest in a McDonalds I suggest that those people in locations with the highest taxes also have the highest profits. Why? Because they also have the most customers resulting in more profit even with the higher taxes."

This is typical of your assertions, that fly in the face of reason. You have suggested some connection, but you have offered no explanation of how this works. Am I to believe that paying higher taxes makes everyone more prosperous? What makes it so? How does it work?

You have often offered a story of a prosperous 19th century US, at a time when tariffs were high. You conclude that the latter caused the former, but, what is the mechinism by which this works? You have never made a connection.

You certainly do "get under people's skin", as a persistent fly that buzzes around one's head causes annoyance, when no amount of swatting with the "invisible hand" deters you.